Unlock document.
This document is partially blurred.
Unlock all pages and 1 million more documents.
Get Access
ACCOUNTING ACROSS THE ORGANIZATION
Costco Wholesale Corp. has always had a generous return policy, but adopted a
new policy requiring that certain electronics be returned within 90 days of their
recognition?
Answer: If a company expects significant returns, it should make an adjusting
entry at the end of the year reducing sales by the estimated amount of
revenue recognized in the period.
C. Adjusting Entries.
2. At the end of each period, for control purposes, a merchandising company
3. The company may need to adjust the perpetual inventory records to make
the recorded inventory amount agree with the inventory on hand. This involves
debiting (or crediting) Inventory and crediting (or debiting) Cost of Goods
Sold.
D. Closing Entries.
1. The temporary accounts with credit balances are closed to Income Summary.
Summary.
3. Income Summary is closed to the Retained Earnings account.
4. The Dividends account is closed to the Retianed Earnings account.
E. Forms of Income Statements.
Merchandising companies use one of two forms for the income statement:
1. Multiple-step income statement.
other expenses and losses.
2. The multiple-step income statement reports gross profit (net sales less
cost of goods sold).
the gross profit rate.
b. The gross profit rate is computed by dividing the gross profit amount by
net sales.
the gross profit amount.
3. Single-step income statement.
a. All data are classified into two categories:
and gains.
(2) Expenses include cost of goods sold, operating expenses, and
other expenses and losses.
*F. Using a Worksheet.
column to the balance sheet debit column.
3. Sales Revenue, Sales Returns and Allowances, and Sales Discounts are
column.
4. Cost of Goods Sold is extended from the adjusted trial balance column
to the income statement debit column.
*G. Determining Cost of Goods Sold Under a Periodic System.
1. Determining cost of goods sold is different under the periodic system
than under the perpetual system.
2. Under a periodic system, the company uses separate accounts to record
freight costs, returns, and discounts.
3. At the end of the period, a company calculates the balance in ending
inventory, and cost of goods sold for the period.
4. The steps in determining cost of goods sold are:
a. Record the purchases of merchandise.
b. Determine the cost of goods purchased: Purchases less purchase
returns and allowances and purchase discounts plus freight-in.
c. Determine the cost of goods on hand at the beginning and end of the
accounting period.
*H. Periodic Inventory System.
1. Companies record revenues from the sale of merchandise when sales
are made, just as in a perpetual system. But companies do not attempt
on the date of sale to record the cost of the merchandise sold.
2. Companies record purchases of merchandise in the Purchases account
rather than the Inventory account.
3. Freight costs are recorded in a Freight-In account which is a temporary
account whose normal balance is a debit.
4. When a purchaser returns merchandise for credit or receives a discount
for prompt payment, it is called purchase returns and allowances or pur-
chase discounts. Purchase Returns and Allowances and Purchase Discounts
A Look at IFRS
KEY POINTS
Under both GAAP and IFRS, a company can choose to use either a
perpetual or a periodic system.
providing of services.
Under GAAP, companies generally classify income statement items by
function. Classification by function leads to descriptions like administration,
distribution, and manufacturing. Under IFRS, companies must classify
expenses by either nature or function. Classification by nature leads to
financial statements.
Presentation of the income statement under GAAP follows either a single-
step or multiple-step format. IFRS does not mention a single-step or
multiple-step approach.
Under IFRS, revaluation of land, buildings, and intangible assets is
income.
IAS 1, “Presentation of Financial Statements,” provides general guidelines
for the reporting of income statement information. Subsequently, a number
of international standards have been issued that provide additional
guidance to issues related to income statement presentation.
Copyright © 2014 John Wiley & Sons, Inc. Weygandt, Financial Accounting, 9/e, Instructor’s Manual (For Instructor Use Only) 5-15
Similar to GAAP, comprehensive income under IFRS includes unrealized
gains and losses (such as those on so-called “non-trading securities”) that
are not included in the calculation of net income.
IFRS requires that two years of income statement information be
presented, whereas GAAP requires three years.
LOOKING TO THE FUTURE
cash flows (operating, investing, and financing), so that numbers can be more
readily traced across statements. For example, the amount of income that is
generated by operations would be traceable to the assets and liabilities used to
generate the income. Finally, this approach would also provide detail, beyond
analysts.
20 MINUTE QUIZ
Circle the correct answer.
True/False
1. Measuring net income for a merchandising company is conceptually the same as for
a service company.
True False
a perpetual inventory system.
True False
3. Under the perpetual inventory system, the purchase of merchandise is recorded with a debit
to the Purchases account.
True False
True False
5. A customer may receive a sales discount for goods that are damaged or defective.
True False
6. In a single-step income statement, gross profit and operating income are shown on the
income statement.
True False
7. In the balance sheet, inventory is reported as a current asset immediately below
accounts receivable.
True False
8. Income from operations is determined by subtracting other expenses and losses from
gross profit.
True False
9. Merchandising companies report nonoperating activities in the income statement imme-
diately after the company’s primary operating activities.
True False
*10. In preparing a worksheet for a merchandising firm, all income statement column debits
represent expenses.
True False
Multiple Choice
1. Sales Discounts
a. is a contra revenue account.
b. has a normal debit balance.
c. appears on the income statement.
d. All of these answers are correct.
3. The recording of a sale requires a
a. credit to a sales account and a debit to an asset account.
b. debit to Cash and a credit to Owner’s Capital.
4. Which of the following would not be considered an operating expense?
a. Cost of goods sold
b. Rent expense
c. Freight-out
d. Office expense
a. Gross profit
b. Income from operations
c. Other revenues and gains
d. Net sales
ANSWERS TO QUIZ
True/False
Multiple Choice
